October 8, 2017
by Todd Shaver | Oct 8, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
It’s market mania for assets around the world! Financial markets posted fresh records this week, as the upswing in global manufacturing added fresh legs to the relentless rally in equity and credit markets around the world. The most eye-catching: The U.S. stock market’s volatility gauge set an all-time low Thursday while the S&P 500 Index jumped to a fresh high, its sixth consecutive record close -- a feat last repeated back in 1997. Global stocks posted new record highs amid strong economic data. Credit premiums hit fresh post-crisis lows. Let the good times roll.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: Celgene, PayPal, Google, WageWorks, VMware, and Blackrock.
BMR Companies & Commentary
Celgene (CELG: $139, down 5% - all prices herein are for the week)
Celgene entered into a long-term strategic alliance with Nimbus Therapeutics (private) centered on autoimmune disorders.
Nimbus’s preclinical programs target central mediators of inflammation. Nimbus competes in this area against Bristol-Myers and Gilead. But given Nimbus’s demonstrated track record of success and the promising nature of the targets, the consensus view this alliance as particularly encouraging and indicative of Celgene’s dedication to expanding its presence in immunology and inflammation. Awesome!
Celgene will be given an option to acquire each program. Nimbus will receive an upfront payment and potential milestone payments per program that Celgene chooses to acquire. In the interim, Nimbus will retain full control of R&D activities for each program. Financial terms will be disclosed only in the event that Celgene chooses to acquire a program.
BMR Take: We remain bullish on Celgene as total revenues are expected to rise from $13 billion this year to $21 billion by 2020. We expect Celgene’s four blockbuster drugs (Revlimid, Abraxane, Otezla, and Pomalyst) to drive the revenue growth, while the recent acquisitions of Receptos and Delinia as well as investments in collaborators like Acceleron, Epizyme, Agios, and others will ensure growth from 2017 and beyond. We continue to view Celgene as a top large-cap pick in Healthcare.
PayPal (PYPL: $66, up 3%)
Mastercard and PayPal announced a significant expansion of their longstanding partnership into Canada, Europe, Latin America and the Caribbean, and the Middle East and Africa, to make Mastercard the clear payment option within PayPal across the globe. With the addition of these markets – and following the recent expansion of their partnership into the U.S. and Asia Pacific – Mastercard and PayPal have now reached a global agreement.
Similar to previous agreements, the global expansion will create a number of joint growth opportunities that will advance Mastercard and PayPal’s shared vision to offer consumers greater choice and flexibility to manage and move their money.
For example, PayPal will have the opportunity to expand its presence at the point of sale by utilizing services from Mastercard, allowing consumers to use their Mastercard in their PayPal Wallet to make in-store purchases at more than 6.5 million contactless-enabled locations across the globe. Consumers will also have the ability to quickly cash out funds held in their PayPal accounts to a Mastercard debit card.
BMR Take: People everywhere know and trust the familiar Mastercard brand, whether they’re paying in the physical or digital world. The expanded partnership with PayPal affirms the attractive growth outlook for PayPal’s users could go from the current 200 million to upwards of 1 billion, in our view. This should take the stock much higher.
Google (GOOG: $979, up 2%)
Google parent Alphabet’s internet-by-balloon Project Loon tweeted that they hoped to bring emergency connectivity to Puerto Rico after Hurricanes Irma and Maria left more than 90% of the island without cellphone coverage. Just 7 days later, the Federal Communications Commission Friday gave the company a green light to fly 30 balloons over Puerto Rico and the US Virgin Islands for up to 6 months.
If all goes to plan, Alphabet's balloons will soon help replace the thousands of cellphone towers knocked down by hurricane-strength winds. The balloons would provide voice and data service through local carriers to users’ phones.
Alphabet has previously deployed Loon to provide emergency phone service in Peru following flooding there earlier this year. They had already been working closely with a local wireless network, Telefonica, to coordinate spectrum use and prepare handsets to work with its balloons.
Project Loon was born in Alphabet’s moonshot X division, with the aim of serving the half of the world’s population that is still without internet access. It has launched several successful pilot projects, but Loon has yet to be deployed commercially on a wide scale.
BMR Take: This is such a cool innovative initiative to see from one of the US’s leading tech companies. They are truly improving the world. Companies that do that tend to improve the performance of your portfolio. We remain bullish on Google. We see EPS heading to $60 over the next 3-5 years pushing the stock much higher.
We have been reminding you that this stock was cheap in March at $815 and after setting highs in June, got cheap again in July at $900. It has been on one of these slow Google rolls lately, moving up $3-6 a day for weeks now. We sure hope you have some of this great company. And if you don’t it is NOT too late to buy. It is within a whisker of an all-time high at $988 and we can see it breaking four figures and moving much higher from there.
WageWorks (WAGE: $63, up 4%)
WageWorks cares about people and wants to empower everyone - employers, employees, and their families - to lead healthier, happier, and more productive lives. The company simplifies the complex world of Consumer-Directed Benefits. They make benefits programs easier to understand and use so that everyone can take advantage of pre-tax savings and focus on what matters most.
The latest new development is a partnership with none other than Uber! WageWorks and Uber are revolutionizing your commute, giving you more options on how to get to and from work.
WageWorks has entered into a first-in-market partnership with Uber, the world’s leading rideshare company, to offer you the convenience of using a WageWorks Commuter Prepaid MasterCard, WageWorks Visa Prepaid Commuter Card and TransitChek QuickPay Prepaid Visa Card to pay for uberPOOL rides. This new partnership gives the customer the flexibility to use his or her pre-tax funds to pay for uberPOOL rides when they commute.
What does this mean? Customers can now save up to 40% when they rideshare to work via uberPOOL. That’s more money back in their pocket every month. Use of WageWorks commuter benefits with Uber is currently available in the following markets: Atlanta, Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, Philadelphia, San Diego, San Francisco, Seattle, Washington D.C., and the state of New Jersey. And this will expand dramatically in the coming year.
BMR Take: WageWorks is on track to generate $1.75 of EPS this year. We see a sizeable market opportunity where earnings can double over the next 5 years. WageWorks serves a unique market niche and is an off-the-radar business many people have never heard of, making this name a unique opportunity to outperform the S&P500
VMware (VMW: $112, up 2%)
VMware announced that it is helping Partner Communications (PTNR: $5.20) implement a novel approach to network functions virtualization (NFV) that has resulted in a rapid conversion to NFV and a reduction in cost-per-customer to deliver network services.
What does this mean? First, we will give you the technical jargon. Then, we’ll break it down, as we do best.
Partner Communications, a leading Israeli Telco group, selected Cloudify and VMware to launch its new solution called V-NET. V-NET is delivered through a unique, cloud-based approach to network service orchestration using an incremental approach referred to as "orchestration first."
In layman’s terms, NFV is fundamentally changing the way communications services are provided. The Partner V-NET platform creates intelligent management of communications networks, services and cloud access, enabling IT managers to have direct access to any point or branch of the management interface, while saving significant manpower, time, hardware and money.
BMR Take: VMware has been a solid performer since we started covering the name. We see EPS settling in at around the $5-$6 level. We will continue to scan the opportunities in front of the company for reasons to reassess our EPS outlook higher. This deal above, is just another small reason for the great success of this not-so-small $46 billion market cap company. Remember Dell Technologies owns 83% of VMware. It’s only a matter of time before they make an offer for the 17% it doesn’t own.
We added the stock in January at $83 and currently have a $120 target. We see no reason why this can’t be reached later this year if the stock market stays steady.
BlackRock (BLK: $463, up 4%)
BlackRock is in discussions to invest in financial technology company Capital Preferences to help bolster its focus on retail investors.
Capital Preferences gathers data to help wealth managers understand the risk tolerance and preferences of clients, allowing firms to create portfolios suited to investors’ needs. The talks, which are preliminary, include determining ways of incorporating the company’s software into BlackRock’s existing technology offerings.
The world’s largest asset manager is investing in technology in part to diversify revenue as investor money flows into cheaper passive strategies. BlackRock is also using technology to indirectly expand its reach to retail investors, who are typically charged higher fees than institutions.
BlackRock, which manages $5.7 trillion in assets, has made several strategic investments in startups in recent years with the aim to eventually acquire some. It owns FutureAdvisor and has participated in a funding round for iCapital Network, an online marketplace that offers ultra-wealthy investors and their financial advisers alternative investments.
CEO Larry Fink has recently said that he hopes technology will account for 30% of revenue in the next five years up from 7% currently. BlackRock is counting on its risk management system, known as Aladdin, to help push it toward that goal.
BlackRock's Rob Goldstein, the chief operating officer of BlackRock, thinks there are a lot of misconceptions around one of the biggest trends overtaking Wall Street. BlackRock. One, for instance, is the name.
"We actually believe one of the greatest misnomers is this word “passive” because we don't believe any investment decision is a passive decision."
Passive investing, which means tracking a market-weighted index rather than actively trading single stocks, has steadily eaten away at active-investment management over the past several decades. Index investing has been revolutionary for investors, allowing them to bypass high-fee investment managers, many of which have not performed well. The firms that specialize in index investing and exchange-traded funds, another form of passive investing, have become giants of the industry.
BlackRock is one of them. They pulled in more money into its ETF arm in the first half of this year than all of last year.
And Goldstein added this:
My sales pitch is very simple: BlackRock is a growth company. BlackRock is a growth technology company and we're growing our technology functions. We have a very ambitious plan that we call "Tech 2020." And as part of that, we are looking to extend the 2,000-plus technologists we already have within BlackRock. And we're really excited about the opportunity to take BlackRock, which is already at the forefront of technology in its industry, and keep expanding that.
BMR Take: BlackRock is among the best-positioned companies in investment management, owning the top Exchange Traded Fund franchise (iShares), that is growing rapidly due to “passive” investing, as well as an increasing product portfolio of technology. Recall, there are several top hedge funds on the list of shareholders in BlackRock. With EPS set to approach $30 over the next 3 years, this stock is among our favorites. What a great week the stock had, and we expect much more of the same. Don’t be put off by the high stock price. Think Google at $980 a share!
Upcoming Economic News
JOLTS Job Openings
Wednesday, October 11th,10:00 AM
Period: August
Consensus: 6,170,000
Prior: 6,170,000
PPI ex-Food & Energy
Thursday, October 12th, 8:30 AM
Period: September
Consensus: 2.0%
Prior: 2.0%
Retail Sales ex-Auto
Friday, October 13th, 8:30 AM
Period: September
Consensus: 0.80%
Prior: 0.20%
Update on Shopify
We were able to get our hands on a report from Morgan Stanley recently. Here are some excerpts from it.
Shopify (SHOP: $98, down 16%) Trading at roughly 18 times its forward sales estimate and having never turned a profit, Shopify certainly looks expensive. The company has delivered impressive sales growth so far, but even then, investors are paying a premium for the promise of its business. That tends to be a risky proposition, but sometimes it's one worth pursuing. With that in mind, we think Shopify's momentum and expansion potential actually make the stock cheap, even as it currently trades at all-time highs.
For those unfamiliar with the company, Shopify provides e-commerce platforms as a service -- allowing sellers to quickly launch and conveniently maintain online sales portals. It mostly caters to small- and medium-sized businesses. However, it also counts some larger brands, including Budweiser and Red Bull, among its customers. All told, the company provides service to over 500,000 merchants worldwide -- up from 165,000 roughly two years ago. That's an impressive reach for a young company, but it still leaves lots of room for expansion.
Last quarter saw revenues climb 75% year over year, and the company is doing a good job of growing sales relative to expenses even as it prioritizes expansion over near-term earnings. With Shopify's current customers more or less locked in, reducing its advertising and marketing expenses could quickly shift the company to profitability.
While Shopify is not cheap by the established guidelines of value investing, ownership involves a greater degree of speculation than some investors will be comfortable with. However, Shopify's current price could look like an absolute steal five years from now.
BMR Take: This report was written before this ridiculous Andrew Left started shorting the stock and making a fool of himself on Bloomberg TV and elsewhere. We believe he is wrong and we believe the market will prove him wrong. He is “winning” at the moment as the stock dropped $13 on Wednesday when he went public with his diatribe, $3 on Thursday and $3 on Friday. It had hit $93 on Thursday, so it came back sharply. But he will lose in the end. Remember, he has to BUY BACK his short position at some time, pushing the stock up when he does.
We have to say that the stock was quite strong in the weeks leading up to this Wednesday. This maniac had been shorting the stock in a big way, putting downward pressure on the stock, and yet the stock was moving higher and higher since the middle of August when it was at the $95 level. That tells us there is buying power out there, and as soon as this blows over we expect the stock to start moving back up again. We could easily just bow out of the stock, since we added it in the spring at $73 and thus have a nice gain. But we are going to stay with it because we believe in the company, plus their revenue growth is huge – on the order of 75% last quarter. And you know what we are going to say here: Revenues always win out in the end.
Here is some more from Morgan Stanley:
With Shopify declining 16% this week following circulation of a short report, investors have been digging into details on the company's model. We continue to believe that Shopify has a strong core business model and highlight several of the more frequent questions asked, along with responses:
--- How does Shopify's model compare to a pyramid marketing model?
Answer: Shopify has a success-based model where its revenue is reliant on the success of its merchants. Unlike some pyramid models, there is typically little upfront investment required by merchants on the Shopify platform with no annual commitment required. If a merchant is not successful on SHOP's platform, it can exit the platform with little cost of failure. Historically, we believe churn has been high but Shopify's growth has been supported by the growth of its successful merchants which have outweighed the cost of those that have failed on its platform.
--- How does the company's affiliate marketing platform work?
Answer: Shopify has over 13,000 ad agencies, consultants, and partners that support its marketing efforts with over 500,000 merchants now on its platform. When a partner refers business into Shopify, they can be eligible to receive a bounty. Where bounties are paid, Shopify may continue paying fees associated with referred merchants while they remain on the platform. Affiliate marketing models are not uncommon among small to medium sized web services vendors.
--- How much revenue does Shopify generate from its business exchange?
Answer: Shopify rolled out a myriad of new products and services for its merchants this year. The company's exchange was rolled out this summer and, like other services, is in its early stages and its size is not yet disclosed. We do not believe the company has generated a meaningful amount of revenue from this platform yet. Last quarter, 47% of the company's revenue was generated from Subscription Solutions (subscriptions, themes and apps).
The remainder of the company's revenue (53% of total) can be attributed to its Merchant Solutions business which is primarily payments driven and benefited from approximately $5.8 billion sold over the platform.
--- How much do bloggers contribute to the company's customer acquisition?
Answer: Shopify does not disclose this number. However, the company has stated that most of its merchants are introduced to the platform organically. Paid advertising is the second most meaningful source of new merchants followed by partners, of which bloggers are a subset.
--- To what extent do non-Plus merchants contribute to revenue growth?
Answer: We do not have a breakout of total revenue by merchant category but for Subscription Solutions, management stated that Shopify Plus merchants accounted for over 18% of total monthly recurring revenue last quarter compared to 13% for 2Q16, implying approximately 127% growth for Shopify Plus and 55% for non-Plus business. On the Merchant Solutions side, the company has disclosed that Advanced and Shopify Plus merchants are responsible for over 50% of volume processed over its platform.
Update on Tesla’s Delivery “Problems”
Excerpted from a BusinessInsider article
Tesla has over-promised and under-delivered ever since the company was founded. But investors continue to believe in the genius who runs the company.
Tesla does not benefit from being normal. The company is organized around being special, different, extraordinary. You don't change the world by restraining yourself. And Wall Street doesn't care. Over the past two years, Tesla's stock is up over 1,200% since the company's 2010 IPO.
Tesla's third-quarter delivery numbers were both impressive and depressing. The carmaker is on pace to sell 100,000 vehicles this year for the first time in its 14-year history. But it's also far, far behind with the production of its new Model 3 sedan, the vehicle that's supposed to bring Tesla to the masses and spell the beginning of the end for gas-powered cars.
Getting to 20,000 in monthly production by December now seems like a hopeless expectation, as does CEO Elon Musk's prediction that Tesla will be manufacturing 500,000 vehicles annually by the end of 2018. But the markets are unconcerned. Tesla stock is still up 65% in 2017 and the brand has lost none of its captivating aura.
But it's also obvious that for a car maker that's been around as long as Tesla, they aren’t good at building vehicles.
So why is Tesla struggling to build the Model 3 on its own admittedly ambitious schedule?
1. The Model 3 is all-new production.
Tesla is reasonably good at manufacturing its expensive, luxurious Model S sedans and Model X SUV. Production of these vehicles was designed around a run-rate of about 100,000 per year, and Tesla will hit that mark most likely in 2018.
Of course, the Model X endured "production hell," as Musk memorably put it, during its roll-out in 2016. The Model S also endured early production issues that were later corrected. And Musk declared that production hell would be back for the Model 3.
Musk talks about Model 3 production in terms of an "S curve," with a very slow ramp rapidly speeding up before leveling off at a desired point. But Tesla also has a second S curve, related to learning. It doesn't know, exactly, how to build the Model 3. Established automakers build cheaper cars in volume all the time; Tesla never has.
2. Tesla enjoys endless patience from everybody.
Tesla's brand equity is probably its most valuable asset. And Tesla knows it. Yes, we aren't going to make our goals — but we also aren't going to lose focus on the big picture, which isn't to sell more cars, but rather to save the planet.
3. Tesla isn't actually mass-producing the Model 3 yet.
Even if Tesla had hit its goal of 1,500 Model 3s in September, it would still be a long way from the levels of production needed to meet demand. The low numbers, which the company chalked up to production "bottlenecks," suggest that the ramp to just pre-mass-production is taking longer than expected.
If Tesla hadn't fallen so short of its own run-rate for September, we could assume some bobbles, but unfortunately, it looks more like the decision to forego the process of testing out the Model 3 assembly line before trying to accelerate the production ramp isn't working out.
4. The Model 3 looks simpler then the Model S and Model X — but is it?
The Model X is complicated. The Model 3 is supposed to be simple. Tesla designed the Model 3 to be easier to build than the Model S and Model X, but compared with electric cars that have now been in production for a while - the Chevy Bolt and the Nissan Leaf, for example - there's a lot of "clean slate" to the newest Tesla.
To build an EV that they can get to market quickly, build easily, and price below $40,000, other manufacturers are just adapting existing gas-car platform to the task. The Bolt doesn't feel all that futuristic inside, and the Leaf has a fairly conventional interior. Neither car is dramatic to look at on the outside.
Tesla has eliminated as much dashboard instrumentation as possible with the Model 3, going for a very clean, minimalist vibe that stars a single, horizontal touchscreen. Although that might sound like it makes everything easier, it doesn't necessarily because it's a major departure from how cars are currently put together.
Ultimately, Tesla's plan to simplify will pay off, but in the short term, negotiating the learning curve could slow them down.
BMR Take: As we’ve said many times, this company is speculative. But it sure is fun being on the ride with them.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services
Some good news – bad news. According to Stock Trader's Almanac (STA), October is the last month of the “Worst Six Months” for DJIA and S&P 500 and the last month of Nasdaq’s “Worst Four Months”. The bad news is that in post-election years, the DJIA has been up 11 times in 17 years with an average gain of 0.7%, but in the last three years ending in “7,” October has been trouble. In 2007, the bull ended and the financial crisis began, in 1997 the Dow plunged 12% and in 1987 the market crashed on "Black Monday", a day we will never forget. [We don’t buy these types of things at The Bull Market Report.]
The good news is that, looking back through history, a big upside move of over a 5% gain on the S&P 500 during the Worst Six Months (or the “Sell in May” period) from May through October has usually been followed by great gains in the overall market. Thus far, that 5% gain has happened. There is just one month left in the Worst Six Months. So if the market can pick up further gains in October and not succumb to the historical and often self-fulfilling prophecy of "Octoberphobia" – and particularly the curse of the 7th year - that would be, according to STA, a solid indication for stronger gains over the next Best Six Months (November to April) and 2018.
We understand the argument that this bull market is way long in the tooth. However, there is another maxim of Wall Street that says, "Bull markets don't die of old age; they die because of recessions or policy mistakes". We see nothing on the horizon indicating we are headed for a recession. The Fed could overplay its hand by hiking interest rates too high and too fast. However, we think if the Fed errs it will be on the side of "too little" rather than "too much" because, so far, it has been very conservative in its approach to normalizing both its balance sheet and interest rates. We do think it will be a "policy mistake" for Congress not to pass meaningful tax reform – the market is 100% counting on this happening and if it doesn't, good earnings might keep the market afloat, but probably won't be enough of a catalyst to produce meaningful gains until some of the PE multiple expansions are digested. Bottom line: Tax cuts are now the most credible and legitimate “bullish” or “bearish” wildcard remaining for the markets in 2017.
From a bullish standpoint, real tax cuts could easily push the S&P 500 up another 4% or 5% because that will increase expected 2018 EPS to a conservative $145/share.
From a bearish standpoint, while tax cuts aren’t quite yet "fully" priced into stocks, there is the expectation they will get done, especially regarding foreign profit repatriation. If tax cuts, like healthcare, fail, then we’re now sitting with a market at 18X next year’s earnings and no identifiable future growth catalyst (and a Fed raising rates). We believe that will cause investors to reduce exposure and, if we had to make a guess based on these fundamentals, we would expect a potential pullback in the 5-10% range should Congress fail to enact promised tax reforms, compared to anticipated 5-10% gains over the next Best Six Months if reforms are passed.
An Update on Teva Pharmaceuticals
The FDA approves Mylan's generic Copaxone, Teva shares lower
Shares of Mylan (MYL; $38, up 23%) are 18% higher while shares of Teva Pharmaceuticals (TEVA: $15.94, down 9%) drop sharply following the FDA's approval of Mylan's generic Copaxone: Glatiramer Acetate Injection. Teva management followed up the announcement with a press release estimating the impact of the two launches to its Q4 earnings of at least $0.25/share and while they have planned for the introduction of eventual generic competition and remain confident in Copaxone, but that it is too soon to officially comment on any change to their full year business outlook.
Most analysts see it as a clear negative for Teva as the generic approval comes earlier than expected with most firms anticipating a 1Q18 arrival. That said, this is a long anticipated event and firms estimated the impact to shares should be closer to the 5% range with some preferring to see the news as removing an overhang on shares that could clear the deck for management.
For Mylan, analysts call it a significant win/positive, given the process was a long drawn out 7-year pursuit and Mylan landed the first approval with potential exclusivity.
The firms suggest that any generic entry may take some time and/or over a protracted period, which could make the opportunity for Mylan quite long-tailed with high margins and thus quite negative for Teva.
This is the day that TEVA investors have dreaded for many years. We believe the bulk of the downside from the loss of Copaxone sales is already priced into TEVA shares.
This news comes earlier than Teva expected and some investors had thought possible. Given the potential $0.25 impact per quarter and applying this to full year 2018, it is possible Teva's new 2018 guidance could fall well below $3.00.
BMR Take: We’ve had it. We have put up with a lot of negatives with this company. What’s next? What will they disappoint us with next?
We’re out. We added the stock in May at $29 and it has gone straight down. Bad choice on our part. We are truly sorry.
If you want to stay in and wait, you can. These suggestions of ours are just that. It is always up to you depending on your own goals. More than likely the stock will stay at this level for months and if things go well, will slowly inch back up. We say this is likely, but if things get worse, we could see $13 at this time next year.
The High Yield Corner
By Michael Foster
For a long time, the market simply didn’t believe the Federal Reserve would hike rates three times in 2017. The probability of a rate hike in December, as calculated by Treasury futures markets, was far below 30% for a long time. Then in September Janet Yellen made it very clear that a rate hike was coming. Even through the fog of “Fed speak,” the Fed’s intentions are incredibly clear, and futures markets responded accordingly. As of this time of writing, the futures market is implying an 89% probability of rates going up.
We’ve been here before. In 2015, the market reacted swiftly to Yellen’s public statements, and we saw a lot of carnage in the high yield world as a result. If you were in the market back then, you remember seeing just about anything with a big yield, from BDCs to municipal bonds and everything in between, falling hard at the end of the year. Several analysts (myself included) rightly called this a buying opportunity of a lifetime. Since the start of 2016 to now, many high yield investments, including those recommended by The Bull Market Report, rose by double digits not including dividends. That’s big.
Yet with this reversal in market expectations, the high yield market has remained mostly unfazed. Traders and investors have learned their lesson: A sudden collapse in yield just means a buying opportunity, because the income stream from these investments remains largely sound and trustworthy. This is why the recent Fed announcements haven’t caused as much of a buying opportunity as they did two years ago.
There are, however, exceptions. Unsurprisingly, those exceptions tend to be very popular with retail investors who are somewhat risk averse and tend to sell off too aggressively in times of caution. This is why we’re seeing a pretty big hit among some high yielding REITs, although there’s been virtually no news to suggest there’s any problem with any of these companies.
Among Bull Market Report picks, Welltower (HCN: $68, down 3%) was hit the hardest last week. While there hasn’t been any news that has any material impact on the REIT, Welltower shares continued a protracted slide that began in mid-September and has been aggravated by the Fed’s comments. Nothing has changed in the company’s business operations, and its FFO still exceeds payouts by a healthy margin (although, it must be admitted, not the healthiest). Now shares are yielding 5%, the highest yield since March of this year. And just like March was a great buying opportunity, so is right now, although we may see yields climb up to 5.5% before the stock bottoms, as we saw happen in November 2016 when, you guessed it, investors sold off in a panic over rising interest rates.
Considering the stock is similar to Welltower in many ways, it is not surprising to see Ventas (VTR: $63, down 3%) react similarly. At a 4.6% yield, Ventas’s recent slide also brings it to its lowest point since March, although there’s no news to indicate the firm is facing any new hardships. In fact, one of the exciting things about Ventas is that it’s been diversifying aggressively into the medical office space, where capitalization rates can often grow faster than with skilled nursing facilities. Additionally, medical offices are less exposed to the whims of regulators and Medicare funding. The market isn’t rewarding this shift - at least not yet. Instead, traders are focusing on interest rate issues. Considering Ventas’s size gives it a relatively low borrowing cost, its 0.56 debt-to-asset ratio is conservative in the REIT sector. It’s clear that the selling pressure on this stock is unjustifiable. That doesn’t mean it won’t go lower in the coming weeks, but it does mean the stock is quite likely to go higher after the rate hike and the market realizes this actually didn’t hurt their balance sheet.
Elsewhere in the REIT space, we saw a lot of dull action. Digital Realty Trust (DLR: $118) and Apollo Commercial Real Estate Finance (ARI: $18.20) ended the week flat, despite both REITs’ relative price outperformance throughout 2017. Similarly, we saw Nuveen AMT-Free Municipal Credit Fund (NVG: $15.43) and Invesco Municipal Trust (VKQ: $12.72) stay flat for the week. While comparing muni funds to REITs is very much apples to oranges, in this case the comparison is illuminating. Here we’re seeing a trend that encompasses much of the high yield universe - the market is largely shrugging off Yellen’s rate hike talk. In part that’s because municipal bonds, especially after the recent hurricanes, and these REITs in particular (thanks to their cloud computing and complex financial structure, respectively) are less popular with retail investors right now and more popular with institutional investors, who tend to react less aggressively to upcoming rate hikes.
What, then, should high yield investors do? Right now, there’s no reason to sell anything in The Bull Market Report portfolio. What’s more, the more aggressively sold-off REITs are becoming increasingly attractive. What we are seeing is a buying opportunity more than a cause for concern. Sadly, it’s not as good of an opportunity as late 2015, but we should be grateful for whatever we can get in this incessant bull market.
Good Investing,
Todd Shaver
CEO, Founder and Editor
The Bull Market Report
Since 1998
October 3, 2017
by Todd Shaver | Oct 3, 2017 | 11am News Flash
Yesterday evening Goldman Sachs reaffirmed its sell rating for Tesla (TSLA: $335, flat yesterday and down $6 today), predicting Model 3 production will be slower than expected. In the third quarter, Tesla delivered 26,100 total vehicles and 220 Model 3 cars versus the Street estimate of 25,850 and 1,250 respectively. Goldman went on to make a big deal about the miss on the Model 3, and ignoring the beat on the total number of cars delivered.
Tesla had previously said it wanted to produce 1,500 Model 3s in September and 20,000 a month by the end of the year. The company has around 450,000 pre-orders for the vehicle, and because of this unprecedented back order, ordering a new Model 3 today would be delivered in 2018 or 2019. The Street doesn’t think this 20,000-a-month number will be met by the end of the year and we agree.
Goldman increased its six-month price target for the stock to $210 from $200. (This is not a misprint.) Are you serious?
The stock is up 59% this year versus the S&P 500's 13% return.
BMR Take: Are you serious Goldman? Oh – we said that above. Hmmmm. Listen, we have said over and over that this is a very speculative investment and it can either drop to $200 or shoot to $500. But give the company a little slack, please. They are just getting going. And have you ever talked to a Tesla owner? They are all ecstatic. They LOVE their cars. Kind of like the Apple iPhone when it was first delivered 10 years ago. And look what happened to Apple. Need we say more?
August 6, 2017
by Todd Shaver | Aug 6, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Months of boredom broken up by moments of terror. And then quickly back to the boredom. That’s how it’s been for U.S. stocks lately, where vast stretches of tranquility are occasionally interrupted by sudden bouts of selling on headlines trumpeting entanglements of President Donald Trump. It happened again during the last 30 minutes of trading Thursday, when the S&P 500 Index surrendered a quick five points after the Wall Street Journal reported special counsel Robert Mueller was said to have impaneled a grand jury in the Russia probe. More than half the swoon was erased by the close. A similar frenzy occurred July 20th, when Bloomberg News said Mueller was examining a broad range of financial transactions involving Trump’s businesses. The message from professional investors: In a market where the CBOE Volatility Index has consistently hovered just above 10 at historic lows, get used to it. Both the drops and the recoveries.
However, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks: Apple, The Carlyle Group, Athenahealth, PayPal, Teva Pharmaceutical Industries, and Tesla.
BMR Companies & Commentary
Apple (AAPL: $156, up 5%)
Apple delivered solid third quarter results. Let’s break it down for you.
iPhone revenue was $24.9 billion versus the $25.5 billion consensus. Just shy. iPad revenue was $5.0 billion versus the $4.0 billion consensus. Mac revenue was $5.6 billion versus the $5.7 billion consensus. Services (the App Store) – the spot to watch – did $7.3 billion versus the $7.1 billion consensus. All in all, no complaints on the top line.
Average selling prices did trend lower, but who cares. The iPhone sold for an average of $606 versus the $621 consensus. The iPad sold for $435 versus $440 last year. Mac was $1,303 versus the $1,334 consensus. This is minor stuff in the long run. People should be concerned about the long term, big picture vision like we are.
Gross margin of 38.5% beat the Street’s 38.3% and hit the top end of guidance. Operating expenses were $6.7 billion vs. the consensus of $6.6 billion. Profits continue to flood in to the tune of about $800 million per week and now sit at $262 billion.
At the bottom line the company did $8.7 billion in earnings or $1.67 per share vs. $7.8 billion a year ago, $1.42 per share. Fabulous.
An overall great quarter. Apple reported unit and revenue growth in all product categories in the June quarter, driving 17% growth in EPS. The business also returned $11.7 billion to investors during the quarter, bringing total cumulative capital returns to almost $223 billion. Wow!
BMR Take: We remain very bullish. The stock is trading at 17x this year’s consensus EPS of $9.00. The Services business is on pace to double over the next few years supporting growth.
The Carlyle Group (CG: $22, up 6%)
Carlyle reported another strong quarter with EPS of $0.81, beating the $0.41 consensus by a mile. Revenue was $910 million versus the $680 million consensus. The company paid the $0.41 dividend shutting up all the naysayers about the businesses’ ability to consistently return capital.
Part of the big out-performance was admittedly just due to a one-time insurance recovery. But the core business looks great. The company is fundraising hand over fist and continues to generate great investment returns.
Overall, Carlyle produced another strong value creation quarter, with net unrealized gains awaiting to be returned to investors increasing 46% year to date. As a result of the strong performance Carlyle has delivered to fund investors, demand for new funds is high. The company raised over $8 billion of capital in the second quarter with acceleration likely in the second half of 2017.
BMR Take: Carlyle is probably heading to $30. Consensus is looking for a solid dividend of $1.80 next year and $2.15 the following. EPS is running closer to $3. Few institutional investors can buy the stock because the K1 tax structure creates issues. But that will change and when it does, look out on the upside!
Athenahealth (ATHN: $141, up 1%)
Athenahealth announced that the board and management team are conducting a strategic review of the company’s operational and financial strategy, leadership. and governance. Management has commenced a comprehensive review of its operations, cost structure and capital allocation, with the assistance of a globally recognized consulting firm. In conducting its review, the company has identified $100 million in cost-savings opportunities that will drive efficiency and targeted investment in the company's hospital and network services businesses. Athenahealth will provide additional information regarding details of these strategic initiatives by its Q3 earnings release in October. Co-founder Jonathan Bush, a cousin to former U.S. President George W. Bush, will remain as the chief executive of the company.
Athenahealth also intends to augment its senior management structure to establish the role of president. The president will be responsible for the execution of Athenahealth’s business operations and will report to Athenahealth CEO, Jonathan Bush. As previously announced, the company is also working to identify a CFO. The board has retained a search firm to fill the president and CFO roles promptly. Finally, the board plans to separate the roles of chairman and CEO and is working to recruit an independent chairman. In addition, the board has begun a search process to appoint an additional independent director. Recall, all this has been brought about by Elliott Management, a major activist hedge fund that disclosed a 9.2% stake in the company back in May.
"Athena needs a management team and operating plan that can successfully tackle the next stage of growth," said a portfolio manager for T. Rowe Price New Horizons Fund. "This plan is a large step in the right direction."
The company said its bottom line climbed to $20.5 million, or $0.51 per share in 2Q. This was higher than $13 million, or $0.34 per share, in last year's second quarter. Revenue for the quarter rose 15% to $300 million, up from $260 million last year.
The company, said it would invest in its fast-growing hospital and network services businesses.
BMR Take: With Elliott Management in there shaking things up, there is a lot of excitement ahead. We love this company but believe now is the time to take profits. We are up 38% since we added the stock at $103 in November. The PE is still a ridiculous 280 and to get it down to a ridiculous 70, profits will have to quadruple, which will take years. We hereby remove the stock from the portfolio.
What should YOU do? Totally up to you of course. You can sell, or you can stay the course and maybe the stock will continue its big ride. If you stay, you can protect yourself two ways. You can sell calls on the stock, say the December $150 for $10. Or you can put a stop order in place at say $135 or $130, to protect your gains. If the stocks goes higher, fabulous.
PayPal (PYPL: $59, down 1%)
PayPal is on a roll with new partnerships. The latest - Skype!
Skype is all about trying to make your life easier and more efficient. That’s why they recently developed Send Money, a Skype feature that allows you to transfer funds via the Skype mobile app while you’re in the middle of a conversation using PayPal. Sweet!
Skype users wishing to send money from a PayPal balance or a U.S. debit card won’t be charged for transactions, making it similar to how PayPal’s other peer-to-peer payment platforms function.
Potentially more important than this alone is that this is a deal with Skype's parent company, Microsoft, which now establishes a relationship with them. Last month, PayPal inked deals with the likes of Samsung Electronics, Apple, and JPMorgan. Skype has reportedly been downloaded over a billion times and boasts approximately 300 million monthly active users. Wow!
BMR Take: PayPal is at 200 million users in a world where Facebook is running a global internet business model with 2 billion. You see the growth here? !! We are riding PayPal far into the future.
Teva Pharmaceutical Industries (TEVA: $21, down 36%)
Teva announced earnings and got rocked. Revenues of $5.7 billion versus $5.0 billion last year. EPS of $1.02 versus $1.25 a year ago. Dividend of 8.5 cents, down 75% from 34 cents in the first quarter of 2017. The company only lowered EPS guidance from $5.10 to $4.40, which makes the stock very inexpensive relative to where it is trading right now on earnings. However, the problems are big.
Second quarter results were lower than anticipated due to the performance of the U.S. Generics business and the continued deterioration in Venezuela. In the U.S. Generics business, the company experienced accelerated price erosion and decreased volume mainly due to customer consolidation, and greater competition as a result of an increase in generic drug approvals by the FDA, and some new product launches that were either delayed or subjected to more competition. Not good.
In response, Teva must take swift and decisive actions. The company is now focused on executing meaningful cost reductions, rationalizing assets and maximizing value, actively pursuing divestiture opportunities and strengthening the balance sheet.
BMR Take: Life brings adversity. You, dear reader, have been around long enough to know this. This stock has just been rocked as bad as the loser in a UFC title fight. But it is just silly cheap right here. Buy more? Yes, if you are ready to take on some volatility. Sell? Not here. Hold? This seems like the best course of action with intentions to exit once the price gets up off the floor mat.
Tesla (TSLA: $357, up 7%)
Tesla reported Wednesday that its net loss widened in the second quarter as they opened new stores and prepared for the launch of its new lower-cost Model 3 sedan.
The loss grew 15% percent to $335 million from a loss of $290 million in the year ago quarter. But Tesla's adjusted loss of $1.33 per share, handily beat Wall Street's forecast of a $1.88 loss.
Revenue more than doubled to $2.8 billion, also beating Wall Street's forecast of $2.5 billion. Tesla's shares jumped 6% percent after the earnings release. Tesla saw significant growth in its energy generation and storage business, which contributed about 14% of its revenues. It bought solar panel maker SolarCity late last year and said it began taking orders for its new solar roof tiles in the second quarter, and recently began installations.
But most attention was focused on the Model 3, which was delivered to its first 30 customers — all Tesla employees — last week. CEO Elon Musk said the company has 500,000 reservations for a Model 3 and it wants to ramp of production as quickly as possible. But Musk has warned of “production hell” for the next six months or longer as the company goes from building 100 Model 3’s in August to 20,000 Model 3’s by December. He wants Model 3 output to grow to 40,000 cars per month by sometime in 2018.
Musk made a surprise announcement during Wednesday's second-quarter earnings call. Musk said Tesla will no longer use an entirely different vehicle architecture to build the Model Y, the compact SUV due to hit the market by 2020. Tesla will instead borrow from the Model 3's platform. That should make Model Y production a lot easier in the future. "Upon the council of my executive team to reel me back from the cliffs of insanity, the Model Y will, in fact, be using substantial carry over from Model 3 in order to bring it to market faster," Musk said. "I have to thank my executive team from stopping me from being a fool," Musk said. "Model Y will have relatively low technical and production risk as a result."
Tesla is averaging about 1,800 orders per day for its Model 3 since its big event a week ago Friday. Extrapolated, that’s over 50,000 orders a month. It opened 29 new stores and service centers in the second quarter in order to meet Model 3 demand. It's also planning to double the number of fast-charging Supercharger outlets this year to 10,000 worldwide. The company delivered 22,000 Model S and Model X vehicles in the second quarter. That was up 53% from the same quarter a year ago, but down from 25,000 in the first quarter.
Management is expecting positive Model 3 gross margin in Q4 and targeting 25% margin in 2018. Model S and Model X deliveries are expected to increase dramatically in the 2nd half of 2017.
During the initial phase of the Model 3 ramp in Q317, the volume produced will be tiny relative to the installed production capacity. As a result, Model 3 gross margin in Q3 will be impacted by the excessive allocation of labor and overhead costs and depreciation over this tiny volume. In the absence of these one-time elevated cost allocations, Model 3 gross margin in Q3 would already be positive, resulting in a positive cash contribution.
BMR Take: The future of automobiles are electric and Tesla runs the show. We are looking at EPS estimates of $14 in 2020.
Upcoming Economic News
Consumer Credit
August 7th, 3:00 PM
Period: June
Consensus: $16.0 billion
Prior: $18.4 billion
JOLTS Job Openings
Tuesday, August 8th, 10:00 AM
Period: June
Consensus: N/A
Prior: 5,666,000
Wholesale Trade
Wednesday, August 9th, 10:00 AM
Period: June
Consensus: 0.40%
Prior: -0.50%
PPI
Thursday, August 10th, 8:30 AM
Period: July
Consensus: 0.10%
Prior: 0.10%
CPI
Friday, August 11th, 8:30 AM
Period: July
Consensus: 0.15%
Prior: 0.0%
Google Reports Earnings
Google (GOOG: $928, down 1%) continues to reports huge gains in sales and earnings, despite having to pay the European Commission a $2.7 billion fine. EPS of $5.01 beat estimates by $0.60 and revenues of $26.0 billion beating estimates by $400 million. Total revenue was up 20% year over year, and was in fact up 23% when adjusted for currency fluctuations. 87% of Alphabet's $26 billion of revenue during the quarter came from advertising, which was up 18%. Google’s “other” business - everything that’s not advertising, including its cloud business and Google Play app store - grew 40% year over year to $3.1 billion. “Other” now represents 12% of Google’s business, up from 10%. Sales from the Europe and Africa account for about 34% of the company’s overall revenue,
Google's paid clicks were up 52% year over year. The average cost-per-click was down 23% year over year. We are not fretting over the last statistic. But we are salivating over the first. 52% growth. Huge.
Advertising revenue growth was driven by mobile and YouTube. And the cloud business was big. Cloud deals larger than $500,000 tripled year over year.
BMR Take: Buy today. Buy tomorrow. Buy next month. Buy next year.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The number one question to us over the past few weeks has been, "When is this bull market going to end?" Run away as fast as you can from anyone who tells you they know. That said, however, it is a very important question to ask because, believe it or not, risk matters. And you can rest assured that Murphy's Law will prove that risk matters most when it appears risk no longer exists. The S&P 500 is up nine straight months and the VIX hit an all-time historical low last week. The media seems to think that, somehow, no one seems nervous. That's not what we see. We see a lot of nervousness and the question we prefer to answer instead of being asked to foresee the future is, "What signs of a bear market do you see today?"
Aside from the always present danger of a global conflict, we do not see the most common indicators used to predict coming recessions such as falling sales, production and earnings. What is happening instead is a real turnaround in earnings growth momentum to the upside. The key ingredients for a typical bull market are still in place:
The economy is expanding.
Earnings growth is accelerating – we've seen three quarters in a row and 2Q17 looks like it will be the best so far. Stocks are not cheap, but with few exceptions they still offer a more attractive value than bonds (The 10-year Treasury is still around 2.3%)
One Wall Street research firm recently said, "Just realize that this bull is eight years old. The easy gains have been made. Now it's a slower grind higher. So stay focused on the key long term trends and be patient waiting for the profits to unfold".
What we read into the words, "a slower grind higher" is a market that has more of a pattern of two steps higher and one or one-and-a-half steps lower, rather than the four or five steps higher to each step backward that we have enjoyed for several years. It is a rare year that the market doesn't experience a 5% pullback at some point – we think that would be not only be normal but also a "healthy" thing to see. Stock Traders Almanac, researching patterns in the market over the past 50 years, reports that strong post-election years typically point to summer selloffs. Looking at the 50-year charts, these seem to range in the 4% or the 9% area with the "average" being somewhere in-between. We don't see anything that would make us disagree with historical norms because "It's different this time". Thus, we expect to see some sort of sell-off over the August-October time frame that's in line with historical averages.
However – Oppenheimer announced last week that it was raising its 2017 earnings estimates for the S&P 500 from $125 to $129 per share, and raising its year-end target for the index from 2450 to 2650. Most resources we follow have a price target between 2500 and 2650. Should we see a decline from 3% to 10%, most experts are saying that there will be a substantial year-end rally from that low point which will propel the market to further all-time highs by next year. But that's the "slower grind higher", and watching the market drop 10% and then going all the way back up to get another 5% or 6% will not be "easy". To that end, patience will be a true friend and we would also keep in mind that, "Without a selloff, there can be no rally".
The High Yield Report
By Michael Foster
Special to The Bull Market Report
Earnings season for REITs continues, and the news for Bull Market Report subscribers has been great.
Government Properties Trust (GOV: $18.35, up 1.5%) saw sales and earnings beat expectations by a healthy margin. Revenues rose 9% year-over-year to $70 million and FFO for the quarter beat expectations by a penny at 60 cents per share. On a trailing 12-month basis, dividend coverage is now 132%, above the 130% cutoff that we prefer and far beyond many more “conservative” REITs.
Government Properties Trust is a really interesting stock, because it is always seen as extremely high risk despite its business model and fundamental results. Quarter after quarter, Government Properties Trust reports high occupancy rates, strong revenue, and a healthy amount of income that is higher than dividend payouts. So why does the market give this stock a 9.5% dividend yield, when some REITs with worse dividend coverage ratios are yielding 5% or even less?
A large part of it has to do with the company’s size. At a $1.8 billion market capitalization, the firm is definitely one of the smaller and less geographically diverse. But that lack of diversification is more than offset by its business model: renting to United States government agencies and offices, usually with long-term lease contracts. Back in 2013-2016, when expectations of a shrinking government were rampant (and actual downsizing was happening a bit), this didn’t seem like a good thing. But we’ve seen this REIT weather that storm, thanks in no small part to its tenant mix and, most recently, its move into more conventional office leasing.
But now that government downsizing is not as sharp of a focus in D.C., Government Properties is quietly driving revenue with strong demand from government agencies, who are also quietly expanding. On the firm’s earnings call, President David Blackman announced that 290,000 square feet of new and renewal leases were completed in the second quarter, with 235,000 square feet being rented to government tenants. The weighted average lease term for those leases is 8 years.
This means 82% of the revenue the company is going to get over the next 8 years is virtually guaranteed by the full faith and credit of the United States. On top of this safety, the REIT reported that 22% of the firm’s rented space is going to face an expiration in the next two years. Let’s dig into that. If that 22% remains vacant, and there’s no growth anywhere else in the firm’s portfolio, that means annualized FFO would drop to about $1.76 just a hair above the company’s $1.72 dividend.
Obviously, this is an extreme scenario that is virtually impossible to occur. Even in the depths of the 2008-2009 recession, REITs simply did not have a 78% occupancy rate. So even in the most absurdly dire, extreme hypothetical scenario, Government Property’s dividend is secure.
This is why the stock is really worth buying even as its yield is over 9% and despite the 24% price drop we have seen over the last year. The stock is volatile because there’s a lack of investor enthusiasm - but as a vehicle for capturing an income stream, it’s a solid choice, especially now after its drop.
Let’s talk about another REIT that released earnings this week - Apollo Commercial Real Estate Finance (ARI: $18.01, up 1%), which reported a slight miss on revenues that rose 33% year-over-year and EPS of 46 cents, in line with expectations.
Looking over the press release and listening to the earnings calendar, there really isn’t much to raise eyebrows - which is why the stock didn’t really change much. In a way, the firm’s results are best summarized by CEO Stuart Rothstein, who said this during the earnings presentation:
"Importantly for Apollo's business, transaction volume remains healthy driven by both a significant amount of capital committed to or targeted for value add real estate equity investment and the availability of various debt financing alternatives. At present, Apollo has a strong pipeline consisting of both new opportunities many of which involve repeat clients, as well as the option and opportunity to participate in the refinancing of some existing transactions.”
There are no surprise new investments, no sudden influx of demand for commercial loans or new borrowers coming to the table. It’s very much business as usual. And that means $800 million in new investments year-to-date for the firm and an extra $150 million in funding on previously closed transactions. This contributed to 46 cents in net interest income, giving the dividend a pretty worrisome coverage ratio on a trailing 12-month basis: 98%.
There are a couple of things to keep in mind. This is a mortgage REIT (mREIT), where dividend coverages tend to be significantly lower than in property REITs. Investors are compensated for this with a higher dividend yield, and Apollo Commercial is giving a 10% yield right now. However, investors need to brace for the possibility that the dividend could get cut in the future - although the cut could be miniscule to bring the company back to a 100% dividend coverage ratio.
Fortunately, that is extremely unlikely for one reason: This company has been growing like a weed, as you can see from revenue jumping by a third from a year ago. This is very much a growth income stock - an odd thing that is hard to find, but needs to be thought about differently. High yield stocks tend to rise in price, and thus have a lower yield, as the company proves the sustainability of its income stream over time.
Of course, there is a risk that the growth will slow or stop, and that’s one of the big risks that this stock’s big yield is compensating investors with. So far, there is no indication that the growth will stop - the healthy pipeline of loans makes it clear that there’s still room for the company to grow into its dividend. But there’s also no indication that growth is on track for a rapid expansion - instead, it’s simply chugging along. That probably means investors can expect its yield to continue and its stock to stay where it is - which means it’s a great hold for now to capture those 10% dividends.
Good Investing,
Todd Shaver, CEO, Editor and Founder
The Bull Market Report
Since 1998
July 31, 2017
by Todd Shaver | Jul 31, 2017 | Earnings Preview 6 AM
Shopify (SHOP: $92)
Bull Market Report Target Price: $90
Bull Market Report Sell Price: $65
Earnings Date: Tuesday, 8:00 AM ET
Consensus: 2Q17
Revenues: $145 million
EPS: -$0.07
Year Ago Quarter Results
Revenues: $85 million
EPS: -$0.04
Key Things to Watch For in the Quarter
Analysts estimate that Shopify will report a 65% increase in revenue to $144 million but still show earnings slightly in the red. Shopify has beaten estimates in the past four quarters, contributing to the 150% appreciation in the stock since this time last year. The stock has started to level out over the past few months in the $90-$92 range, but we are confident this is merely a hesitation before the next breakout.
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Apple (AAPL: $149)
Bull Market Report Target Price: $155
Bull Market Report Sell Price: We would not sell Apple
Earnings Date: Tuesday, 04:00 PM ET
Consensus: 2Q17
Revenues: $42 billion
EPS: $1.57
Year Ago Quarter Results
Revenues: $45 billion
EPS: $1.42
Key Things to Watch For in the Quarter
Analysts across Wall Street expect that Apple will report a healthy 10% growth in EPS to $1.57 and a 5% decrease in revenue to $42 billion. Apple has beaten estimates in each of the past four quarters. This success has contributed to the 40% appreciation in the stock since this same time last year. Although Apple’s top line has slowed down, we expect its innovative board and executives will roll out offerings to spur growth in future quarters.
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Carlyle Group (CG: $20)
Bull Market Report Target Price: $22
Bull Market Report Sell Price: $13
Earnings Date: Wednesday, 8:00 AM ET
Consensus: 2Q17
Revenues: $680 million
EPS: $0.43
Year Ago Quarter Results
Revenues: $530 million
EPS: $0.35
Key Things to Watch For in the Quarter
Carlyle Group is expected to report strong revenue and EPS growth for 2Q17. Analysts estimate that Carlyle will report an 18% increase in revenue and a 23% increase in EPS. Despite having only beaten analyst estimates in two of the past four quarters, the stock is still up over 20% since this time last year. Carlyle’s stock currently trades at a PE ratio of 23, which is extremely cheap compared to the industry’s average PE of well over 50.
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Tesla (TSLA: $335)
Bull Market Report Target Price: $350
Bull Market Report Sell Price: $280
Earnings Date: Wednesday, 04:00 PM ET
Consensus: 2Q17
Revenues: $2.5 B
EPS: -$1.80
Year Ago Quarter Results
Revenues: $1.3 B
EPS: -$1.61
Key Things to Watch For in the Quarter
Analysts across Wall Street expect that Tesla will report revenue growth of 100% to $2.5 billion and an increase in its earnings deficit to -$1.80 per share. Tesla’s is unique because unlike most equities its price is not driven by earnings. Yet. Of the past four quarters, Tesla has only beaten estimates once, but the stock has still appreciated 45% year-over-year. Tesla recently took a 20% hit in early July from the $380 range all the way down to $308, providing investors with a window of opportunity to enter the stock.
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Square (SQ: $26)
Bull Market Report Target Price: $29
Bull Market Report Sell Price: $20
Earnings Date: Wednesday, 04:00 PM ET
Consensus: 2Q17
Revenues: $535 M
EPS: -$0.05
Year Ago Quarter Results
Revenues: $440 M
EPS: -$0.08
Key Things to Watch For in the Quarter
We believe Square will increase its revenues by 22% to $440 million and improve its earnings deficit. Square has beaten estimates the past four quarters rewarding stockholders with 135% year-over-year appreciation. We are very bullish on Square as they continue to break all-time highs and continue to set themselves up for growth in future quarters.
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Annaly Capital Management (NLY: $11.93)
Bull Market Report Target Price: $12
Bull Market Report Sell Price: $11
Earnings Date: Wednesday, 04:00 PM ET
Consensus: 2Q17
Revenues: $595 M
EPS: $0.30
Year Ago Quarter Results
Revenues: $455 M
EPS: $0.29
Key Things to Watch For in the Quarter
We expect Annaly will report EPS growth of 3% to $0.30 and a 23% increase in revenue. Annaly has beaten estimates in two of the past four quarters and is up 7% year-over-year. Yielding a 10% dividend makes Annaly an extremely attractive stock for investors who are looking for both growth and income potential.
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Sabra Health Care REIT (SBRA: $23)
Bull Market Report Target Price: $30
Bull Market Report Sell Price: $21
Earnings Date: Wednesday, 04:00 PM ET
Consensus: 2Q17
Revenues: $55 M
EPS: $0.29
Year Ago Quarter Results
Revenues: $57 M
EPS: $0.53
Key Things to Watch For in the Quarter
Sabra is expected to report a slight decrease in revenue and a big drop in earnings for 2Q17. Sabra has missed estimates in the last three of four quarters, but its stock has remained fairly flat over the past year, only losing about 3% of its overall value. It still trades at a relatively cheap PE of 16 and yields a 7.4% dividend. We expect Sabra to turn things around as the economy continues to show signs of strong growth.
July 30, 2017
by Todd Shaver | Jul 30, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
North Korea test-fired its second intercontinental ballistic missile within a month on Friday, a provocation that heightens pressure on the U.S. and China to find ways to rein in Kim Jong Un’s nuclear ambitions. The U.S. said its top general called his South Korean counterpart to discuss “military response options.” The missile traveled about 620 miles. Trump called the launch a reckless and dangerous action and said "the United States will take all necessary steps to ensure the security of the American homeland and protect our allies in the region.” Why is this so important? It is more than the obvious geopolitical risks. The CBOE Volatility Index (^VIX) touched multi-decade lows earlier this past week at 8.84, but closing Friday at 10.29. It is really hard to see the markets remaining as calm as they are right now. This North Korea news is a fresh reminder that it is highly unlikely the markets remain this placid for long.
However, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks: Amazon, First Solar, Shopify, Square, Facebook, and AstraZeneca.
Highlights From The Past Week
Tech Slide in Week of Upbeat Earnings Underscores Growing Unease. Better earnings equals higher share prices, or so goes the customary thinking. For Technology stocks during this reporting season, it’s the exact opposite. Companies from Google to Microsoft announced quarterly results that beat analyst estimates by a combined 8%, more than any other industry group in the S&P 500 Index. Be reminded, that too much love can prove perilous when momentum reverses. In June, after investors had flocked to Tech stocks anticipating faster earnings growth in a move that pushed the Nasdaq 100 Index to rise twice as fast as the S&P 500, they rushed for the exit all at once, sparking the worst selloff since 2008 relative to the rest of the market.
Focus Turns To The Fed's Balance Sheet. If the Federal Reserve delivers any surprises in the near-future, it will probably come from news on when it plans to start shrinking its balance sheet. Economists don’t foresee an interest-rate hike anytime soon. Yet policy makers might update their language on inflation, because weakness in price data has persisted since they last met, but those changes should be minor.
A larger source of uncertainty stems from the timing of when the Fed will start to shrink its $4.5 trillion holdings of mainly Treasuries and mortgage-related debt. Everyone wants to know how the Fed will cut the bloat after building assets to record levels to help shield the U.S. economy during the financial crisis. Officials expect to begin the process this year and Chair Janet Yellen has said it could get under way “relatively soon.” Her lack of specific guidance has us looking toward the Fed’s meeting in September for an announcement. It sure seems like they would like to get the process started in the Fall. This will undoubtedly be a big shift for markets. But, it is expected and seems to be priced into the markets now. The 10-year Treasury is still very, very low from a historical standpoint at 2.29%. We don’t expect that to change much in the near future.
Howard Marks Sounds Alarm on Tech Stocks. We love to follow what the billionaires say. After all, they have made a lot of money and that is what we are trying to do. Just this week, billionaire Howard Marks, who’s warned of excessive risk in the markets for the past five years, is now sounding the alarm as hazards converge from red-hot Tech stocks, and investor confidence in SoftBank’s $100 billion fund raise. In a 22-page memo -- longer than most of his missives to clients -- the Oaktree Capital Group co-chairman said he sees several phenomena that by themselves seem reasonable but together reveal markets to be heated and risky. “Since we never know when risky behavior will result in a market correction, I’m going to issue a warning today rather than wait until one is upon us,” Marks said. “This warning is likely to feel premature, and perhaps it is, but I think it’s better to turn cautious too soon rather than wait until it’s too late.”
We’re not saying we are in this camp. To the contrary, we remain bullish on America and the stocks in our portfolio. But we want to let you know that there is another side to the bullishness and Marks above is just one of them. But this is nothing new. There are always two sides to every market and guess what? No one knows what the market is going to do in the future. So as we have said many times, if you find yourself with too much worry at night, move out of those stocks that make you nervous and move into the High Yield stocks in our High Yield and REIT portfolios. They are sleep-well stocks that are paying nice 5-10% dividends.
BMR Companies & Commentary
Amazon (AMZN: $1,020, down 1/2% - all changes are for the week)
Amazon traded lower after the company forecast a potential quarterly loss for the first time in two years, a reminder to investors that its reshaping of the worlds of Retailing and Cloud-computing industries doesn’t come without a cost. The company indicated the investment cycle is likely to continue, as it gave third quarter operating income guidance in the range of a $400 million loss to a $300 million profit. Amazon CFO Brian Olsavsky said the third quarter typically sees lower operating income because it has to prepare for the holiday peak season. Revenue guidance came in between $39 billion and $42 billion.
Amazon Web Services remains the company's main growth driver, growing 42% year-over-year, and generating $915 million in operating income. That's more than double the Amazon’s North American business's $435 million in operating income. Its international business continues to lose money with an operating loss of $725 million.
To accommodate exploding growth, the online giant has gone on a hiring spree, pledging to hire more than 100,000 people earlier this year.
The company blew away revenues but came up short on earnings. Revenues were $38 billion in the quarter, up from $30 billion a year ago. Earnings were 40 cents a share, vs. $1.78 last year.
Cash levels remain strong with over $21 billion on the balance sheet vs. just $8 billion in debt.
The company on Thursday said it is boosting spending on new warehouses to meet growing eCommerce demand, data centers for its Amazon Web Services division, video programming to keep customers engaged, and gadgets like the Echo line of voice-activated speakers to stay on the cutting edge of the emerging smart-home market. This comes after shares hit all-time highs Thursday, briefly making Jeff Bezos the richest man in the world. But Gates has staying power after Microsoft reported solid earnings, while Amazon missed estimates and the stock fell a bit.
While analysts remain optimistic about the future of Amazon and their growing revenue, the 2nd quarter earnings report from the company underscored the high cost of its business model. We at The Bull Market Report believe we are in the early stages of the shift of compute to the cloud and the transition of traditional retail online, and that the market is underestimating the long-term financial impact of both to Amazon. That said, Amazon continues to generate high returns on cash invested despite the growing scale of its investments, with significant value in early stage efforts in AI, voice, and robotics. The top line growth acceleration like that we saw in the second quarter is likely to continue in the long term
BMR Take: While EPS estimates are getting knocked around, don’t take your eye off the long term picture. Some analyst models are calling for EPS potential of near $25 in 2020. This could send the stock a lot higher. At the same time, there are many who believe Amazon is a bubble and that Bezos will never allow the company to report sizeable earnings. This is a tough one for us. We believe that Amazon will eventually turn the spigot on and report strong earnings. We aren’t sure when this will happen but we believe it will happen. But others say that he never will.
Oh my – the bulls and the bears fight it out in the end. We are sticking with our bullish stance as we believe revenues ultimately win out (as earnings are destined to follow.)
First Solar (FSLR: $49, up 8%)
First Solar raised this year’s profit forecast on improving terms for power plant sales and unexpectedly strong demand for technology that’s being phased out. This year’s EPS is now seen as up to $2.20, up from earlier guidance of 40 cents. Wow. Gross margins and sales will also come in higher after they shipped a record of 900 megawatts of its Series 4 panel in the second quarter. Big.
First Solar is benefiting from higher module prices in the U.S. as developers and distributors stock up ahead of a potential tariff on U.S. imports. First Solar’s thin-film technology has also seen gains. The sale of its 180-megawatt Switch Station solar farm also came in higher than expected, and management was optimistic for higher margins on two more plant sales later this year. They’re doing a better job of extracting cash out of their sales of plants and modules.
First Solar has begun installing equipment for its larger, more efficient Series 6 panel at its factory in Ohio and plans to ramp up production next year. Analysts estimate that panels can be produced for about 25 cents per watt, less than the 72 cents per watt floor price that may be imposed on imported panels by President Trump under a trade dispute later this year. Chief Executive Officer Mark Widmar said that he may extend production of the Series 4 module even as initial output of series 6 starts this year in Ohio and next year in Malaysia and Vietnam. Stable pricing globally and U.S. tariffs on competing suppliers will factor in that decision. The outlook sure looks good.
BMR Take: First Solar is a top player in a sweet market niche. Better energy efficiency is so important to our future. First Solar’s earnings are re-setting and returning to growth. The stock has almost doubled in the last three months.
Shopify (SHOP: $93, up 4%)
Shopify, the rising e-commerce platform dominated by small business owners, is teaming up with eBay to allow its merchants to sell directly through the online marketplace. The move adds another outlet for Shopify’s roughly 400,000 users. When Shopify signed a similar deal with Amazon in January, its stock surged as investors predicted a boost to revenue.
The company’s strategy has been to integrate with as many online channels as possible, letting its customers diversify away from their personal websites and sell on Twitter, Pinterest, Facebook, BuzzFeed and Amazon. Shopify also provides payment tools, shipping and small loans to help its users build their businesses.
Shopify is a growing player in the battle for turf in the rapidly growing world of online shopping. Instead of building a centralized marketplace such as Amazon and eBay, it provides tools for independent merchants, both large and small to sell online in various ways. It also provides point-of-sale software and hardware for physical stores, similar to Square.
Customers have been asking for Shopify to integrate with eBay for a while. We think a lot of merchants will gravitate toward this new announcement.
BMR Take: Like Amazon? Then you’ll like Shopify. It’s the same big picture story of massive eCommerce growth with a twist of being less widely known. With EPS on track to reach profitability next year, there is a big turn in the stock happening and now is an opportune time to be involved.
Square (SQ: $26, down 2%)
After building a unique payment solution that caters to micro and small merchants, Square is now in the process of rolling out more services (financing, payroll, capital) that accommodates a wider array of merchants and has been successfully moving up-market with a strengthening platform-based approach.
The company has entered a stretch where it’s investing to consolidate its services onto a singular platform with access to services, which should help improve already solid retention, and increase engagement with the company’s services driving robust volume growth. In addition, the company has successfully expanded into four countries outside the US (latest launch in the U.K.)
The company is complementing robust growth with a planned annual margin expansion from operational efficiencies utilizing machine learning and other artificial intelligence techniques.
BMR Take: Given the aforementioned factors, we believe Square is well-positioned to continue solid top-line momentum in 2017, continuing to capture the +$60 billion US market opportunity and beyond (6x opportunity globally) while driving leverage in the business. The company reports EPS on August 2nd. We see compelling upside ahead over the longer term.
Facebook (FB: $172, up 5%) Reported Earnings Last Week
For its second quarter, revenues spiked 45% year-over-year to $9.3 billion, and earnings per share came to $1.32, up 69%. Wall Street’s pros were looking for $1.13 per share in profits. They killed. The stock was up big last week in response, on top of a 44% year-to-date gain.
A few other highlights from the report:
• Daily active users (DAUs) reached 1.32 billion, while monthly active users (MAUs) hit 2.01 billion. Both were up a huge 17%.
• Mobile advertising revenues represented 87% of the total, compared to 84% in the same period a year ago. (We are amazed. 87% of revenues is astounding. We had to double-check what we read.) Remember when they went public and the world thought they had no mobile strategy? What a switch.
• During the past year, Facebook increased global headcount by 43% to 20,700.
• Facebook has $35 billion in the bank and no debt.
Here are the numbers for advertising:
Mobile ad revenue accounted for 87% of the company's total advertising revenue of $9.15 billion in the latest quarter, up from 84% a year earlier. Net income rose to $3.9 billion, or $1.32 per share, from $2.3 billion, or 78 cents per share, a year earlier.
Facebook's CFO once again warned the Street the company's revenue growth is being slowed down by a lower rate of advertisements on its properties, but the Street hardly cared, pushing price targets as high as $210, and the stock zoomed to half a trillion dollars in market capitalization, joining the exclusive club of Google, Microsoft and Apple.
The company noted that there are opportunities for incremental ad load on Instagram, increased engagement from Instagram stories, and potential for new monetization levers through Messenger and WhatsApp.
BMR Take: Facebook is an ad machine like the world has never seen. There is still so much potential ahead. With EPS pushing towards $10 over the next few years, we love this stock.
AstraZeneca (AZN: $30, down 11%)
AstraZeneca plunged after the U.K. drugmaker suffered a blow to its next-generation cancer therapy, with a new drug combination failing to do better than chemotherapy in checking the growth of lung tumors. This has posed a major setback to Chief Executive Officer Pascal Soriot’s ambitions. Imfinzi, used in combination with tremelimumab, didn’t meet a primary endpoint for progression-free survival in the study dubbed Mystic. The drugs were poised to generate more than $7 billion in sales by 2022, according to analysts’ estimates.
The failure calls into question Soriot’s ability to deliver on his growth strategy, put in place to keep the company independent when he rebuffed Pfizer Inc.’s $117 billion-takeover bid in 2014, and may make the firm vulnerable again. Imfinzi, which was poised to become Astra’s biggest medicine by sales, is the cornerstone of its cancer portfolio and key for meeting Soriot’s goal, set in 2014, of boosting revenue to $45 billion by 2023. Sales were $23 billion for 2016, so he has some serious work to do.
“Despite the outcome of the initial readout, we must be patient as the Mystic trial continues as planned to evaluate overall survival,” Soriot said in the statement. The study will continue to assess whether imfinzi or the combination of drugs can help improve life expectancy, with the results expected in the first half of next year.
The Mystic study was a crucial test for Astra’s two immuno- therapies -- a new class of drugs that activate the body’s defense system to attack tumors -- in a race with rivals including Merck, Roche Holding and Bristol-Myers Squibb to dominate the market for cancer treatments.
BMR Take: This is tough news to hear. We will keep a close eye on the situation and consider what to do about it after more careful analysis in the weeks ahead. We don’t like to panic. The stock dropped below our Sell Price of $32, so if you wish to get out you can do so on Monday. The stock came back over $1 on Friday and we are going to stick with it for a little bit more, watching the price closely.
Upcoming Economic News
Pending Home Sales Index
Monday, July 31st, 10:00 AM
Period: June
Consensus: 109.6
Prior: 108.5
Personal Consumption Expenditure
Tuesday, August 1st, 8:30 AM
Period: June
Consensus: 0.20%
Prior: 0.10%
Note: Monthly Personal Income and Outlays data are published by the U.S. Bureau of Economic Analysis. Personal consumption expenditures include consumer spending for all goods and services. These data are published on a quarterly basis in the GDP data release.
Total Light Vehicle Sales
Wednesday, August 2nd, 8:00 AM
Period: July
Consensus: 16.7 million
Prior: 16.4 million
Source: U.S. Bureau of Economic Analysis.
Average Workweek
Friday, August 4th, 8:30 AM
Period: July
Consensus: 34.5
Prior: 34.5
Note: Establishment survey data measuring the average workweek for production or nonsupervisory workers on private nonfarm payrolls.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
It looks like it's a pretty done deal for the S&P 500 to hit 2500 based on a very good earnings trend reported so far. One exception was Google - it went down even though its gross revenues and underlying ad metrics were good. It also beat its earnings per share estimates, but the investment community figured out this beat was driven by taxes and that for the first time in 5 years, traffic acquisition spending outpaced revenue growth. This reminds us of the typical slaughter of a stock because its earnings missed by a penny.
When you think about investing to grow your money into the future, an investor has to be more of a longer-term investor than one single quarter. Big trends don't come and go on a single quarter's earnings. And, speaking of big trends, what giant long-term trends come to mind first? The "no-brainer" is of course Technology – everything from mobile, the cloud, augmented reality, artificial intelligence, alternative energy and autonomous cars. But there is a sector that is bigger than Technology and has beaten it by 300% since 1999.
Healthcare. In a way, it is comprised of a great deal of "technology" on its own – think biotechnology and all of the remarkable medical devices being created. Healthcare also offers just as much innovation and diversification as technology – there are 800 companies and 12 industries to choose from. And today, there is not one but four "mega-trends" fueling the long-term trend behind Healthcare.
The first and most important is of course the once-in-a-lifetime baby boomer demographic tsunami which will drive it for another decade. Secondly, there is a new age of genetics and medical technology which has ushered in unprecedented advances in scientific and medical research. Companies, investors and charities are pouring billions of dollars yearly into R&D, and this is a trend with no end in sight as they seek to find cures for every disease on earth. Thirdly, earnings have been a classic example of what a mega-trend looks like. In 2016, the Healthcare sector was responsible for nearly 20% of the earnings in the S&P 500, bigger than the Financial, Energy, and Telecom sectors combined.
Yes, we are aware there are concerns that the government will try and hold down drug prices. These are, we believe, going to be overcome by the simple concept that everyone can agree they do not want companies to stop trying to find a cure because they no longer can make a profit.
The last trend is that of mergers and acquisitions. The big Pharma companies need to keep their pipelines full and avoid the revenue drops created when patents expire. During this bull market, over $500 billion in deals have been done, mostly by big drug companies buying emerging Giotechs. While the pace of M&A may slow down, we believe it will always be a positive force driving values in the Healthcare sector - especially if any tax reform policy unleashes a tidal wave of overseas corporate cash onto US shores.
Thus, the moral of this story is: If you own a "mega-trend" such as Healthcare, don't let a bad quarter in the stock market make you react like the investor who bails out of a stock because it missed that quarter's expected numbers. Markets go up and down, but Healthcare is a mega- trend we believe won't stop this decade and probably not in the next one either. We think we are right in the middle of this one.
Tesla Update
Tesla (TSLA: $335, up 2%) announced the first deliveries of Its Model 3 on Friday. There was big fanfare and discussion of the 500,000 orders they have for the car and how they are going to ramp up production from 90,000 cars this year to 500,000 next year. We see a coming let-down on this number and we are sure Elon is working on the language now that he will use to tell us that he is not going to make the numbers. But with that said, the company is amazing. The cars are spectacular. Customers rave about their cars like never before. And in the next five years this firm will become one of the greatest firms in the world. (You heard that here first at The Bull Market Report!)
Here are a few tidbits of things the Elon Musk is talking about:
Musk said that by 2020 Tesla will likely be able to make its cars go as far as 745 miles per charge.
The current record for hypermiling in a Tesla is about 560 miles. What is hypermiling? By taking it easy on the gas pedal and brakes, hypermilers achieve gas mileage feats far beyond the fuel economy ratings given to cars by the Environmental Protection Agency. They coast to stop signs, accelerate slowly, and sometimes raise the ire of other drivers.
The official range for Tesla's Model S is about 315 miles per charge, and note that the Model 3 was announced Friday with a range of 310 miles, up from 220 miles that most thought. Do you think Tesla will NOT continue to enhance the batteries over time? If you don’t, you are delusional. There is no question about this in our mind.
Here is some of the Press Release from Tesla on Friday, paraphrased by Bloomberg.
“Three hundred ten.
“That’s the electric range of a $44,000 version of Tesla’s Model 3, unveiled in its final form Friday night. It’s a jaw-dropping new benchmark for cheap range in an electric car, and it’s just one of several surprises Tesla had in store as it handed over the keys to its first 30 customers.
“Tesla has taken in more than 500,000 deposits at $1,000 a piece, Chief Executive Officer Elon Musk told reporters ahead of the event. This has created a daunting backlog that could take more than a year to fulfill - and that was before Musk took the stage in front of thousands of employees, owners, and reservation-holders to lift the curtain on the company’s most monumental achievement yet.
“We finally have a great, affordable, electric car - that’s what this day means,” Musk said. “I’m really confident this will be the best car in this price range, hands down. Judge for yourself.”
Here’s some of what Tesla disclosed at its plant in Fremont, California:
Two Battery Versions
Tesla has simplified the manufacturing process “dramatically,” Musk said. In the same factory space where Tesla can build 50,000 Model S or Model X cars, it will soon be able to produce 200,000 Model 3s. Part of that is due to a simplified package of options.
The car comes in two battery types: standard and extended range. Here’s how they break down:
Standard Battery:
Price: $35,000
Range: 220 miles (EPA estimated)
Supercharging rate: 130 miles in 30 minutes
Zero to 60 mph time: 5.6 seconds
Long Range Battery:
Price: $44,000
Range: 310 miles
Supercharging rate: 170 miles in 30 minutes (Same as Tesla’s Model S)
Zero to 60 mph time: 5.1 seconds
Only one other electric car in the world has broken the 300-mile range barrier: The most expensive versions of Tesla’s Model S, an ultra-luxury car that costs $97,500 or more. The new Model 3 has cheaper range availability than the current record holder, the $37,500 Chevy Bolt, which is outclassed in nearly every way by the Model 3.
Take a look at this video of the introduction of the Model 3:
https://www.bloomberg.com/news/articles/2017-07-29/tesla-s-model-3-arrives-with-a-surprise-310-mile-range
The High Yield Report
By Michael Foster
Special to The Bull Market Report
One of the biggest stories this week in high yield was Welltower’s (HCN: $73) earnings report, which was a very slight disappointment. Revenue fell 2%, slightly short of expectations, to $1.06 billion. FFO of $1.06 was a one-cent beat, again demonstrating Welltower’s continued acumen at financial discipline. The stock was offer a minor 1% for the week.
What about the dividend? Well, the company’s annual dividends are currently $3.48, with an annualized dividend coverage of 122%. That’s good, but admittedly not fantastic - our general rule of thumb is 130% or more dividend coverage should be every REIT’s target. Yet the company’s massive scale - we’re talking about a $27 billion market capitalization company with $30 billion in assets on the balance sheet - indicates that the income stream is extremely well insulated from a sudden market shock. Welltower also reported some interesting developments both in this quarter and in the future, including two properties spanning over 100,000 square feet that are 100% fully occupied. Partly because of this, the company raised its guidance.
Also significantly, Welltower’s borrowing costs went down. The company has lowered its net debt and improved its debt ratio in the quarter - a wise move considering the higher borrowing costs that are impacting the entire high yield universe. This is another indication that Welltower’s dividend coverage, while slightly soft now, will improve over the coming quarters. For this reason, there is a good reason to hold firm and keep buying this stock.
Also this week, we saw Omega Healthcare Investors (OHI: $31) report results quite similar to Welltower, and it too fell over 1% following the news on that day. The company saw revenue rise 4% a touch short of expectations at $194 million with EPS of 87 cents, which was a 2 cent beat. Again financial discipline was at play for the dynamic. Adjusted FFO rose over 3% from a year ago and the company raised its guidance, now expecting full year FFO to be between $3.42 and $3.44. The company also raised its dividend by a penny, continuing its history of raising dividends every quarter.
How did it do this? A big part of the REIT’s results center around its financing strategy. The company retired some unsecured credit and borrowed with new senior lines of credit, helping to lower overall borrowing costs for the firm. Omega also spent $8 million in new investments in the first quarter while spending another $30 million to renovate existing and build new facilities. The new investments include $180 million worth of property - $115 million in the U. K. and the rest in America.
Omega is doing what it does best: expanding its footprint, finding new opportunities, and improving rent potential with existing properties while increasing its dividend. If the REIT reaches its FFO guidance, the dividend coverage ratio will stay over 130%. Yet the stock is down 3% for the week (after the 64 cent dividend Friday) and is yielding a monstrous 8.2%. This is clear irrationality, and tells us that Omega isn’t just a hold - it’s a strong buy. Investors long this stock should continue to appreciate the dividends and expect their growth to continue. Now is a good time to buy more.
Elsewhere in REIT earnings, Ventas (VTR: $67) reported a revenue beat with 5.6% year-over-year growth to $895 million and EPS of $1.06, a penny above expectations. The company also re-affirmed full-year guidance of $4.15 FFO per share, giving it a dividend coverage ratio of about 133%, around the same as Omega Healthcare. Ventas’s long history means that its yield is quite a bit lower as the market trusts this bigger company. Its $24 billion market cap shows strength and diversification. But 4.6% is a very strong income stream in today’s reality of low interest rates, so this stock continues to be a buy for investors who are looking for income.
What about their future? The company spent $110 million on investments in the second quarter to expand its footprint and provide greater dividend growth for investors in the future. There’s just one snag - Ventas funded this with common stock instead of debt, as Omega did. That’s a trifle concerning. Does the Ventas management believe their company’s stock is overpriced? Total liabilities of $13 billion are 56% of the company’s total assets, giving it a pretty decent debt-to-asset ratio that would justify more lending activity. So why is the company issuing shares, thus diluting investors’ positions in the firm?
A large part of it has to do with the relatively low yield on common shares right now - that 4.6% is lower than the rising borrowing costs that floating-rate loans would cost Ventas in the future. So there’s some logic to the move, whereas Omega’s 8% yield is far too costly to issue too many shares versus the 5% or less borrowing costs on debt that Omega can get through bonds and loans. Thus the financial activities of both REITs, while different, make a lot of sense in their own context.
It seems pretty clear that, in a busy week for Healthcare REITs, the recent earnings releases give renewed confidence to stay long these companies and to continue to collect their dividends. Omega seems to be the strongest buy right now, and it makes sense to buy the company at any point when the dividend is more than 8%. We suspect that won’t last long, so it makes sense to add on to your Omega positions now.
Good Investing,
Todd Shaver, CEO, Editor in Chief, Founder
The Bull Market Report
Since 1998
